Kozmo CEO: Can he buck the trend?

Considering the plight of other e-tailers, one might be tempted to pity Kozmo Chief Executive Gerry Burdo.

A couple of years ago, his company was a media darling, the subject of laudatory features regaling how Kozmo dispatched legions of delivery people to pedal, walk or drive consumer goods to customers' doors.

Since then, the company has endured several rounds of layoffs, closed two distribution centers and announced a shift in business strategy. Faced with the task of turning promise into profits at one of the Net's most ballyhooed e-tailing companies, Burdo is trying to weather a ruthless Internet shakeout that has taken down many a former highflier.

When Burdo looks out over the crumbling e-commerce landscape, he acknowledges that most other Internet-only companies are in ruins. Gone are Pets.com, Furniture.com and eToys, just to name a few--companies that bet everything on their Web sites.

To avoid the same fate, Burdo is steering Kozmo away from its Internet-only business model and toward a "clicks and bricks" approach. Some of the $30 million the company received in its latest round of funding will be invested in expanding its business-to-business operations--including leasing its warehouse space and fulfillment operations--and plans are afoot to launch a print catalog in two weeks.

Under Kozmo's new plan, the company also dropped the .com from its name.

Burdo says Kozmo is not backpedaling, but in the same breath adds that strategy "refinement" is the order of the day. He recently talked with CNET News.com's Greg Sandoval to offer an update.

You have a lot of young people working for you, Gerry. The media has made a lot about Kozmo's customers and have said the company's delivery service appeals mainly to couch potatoes and burnouts.
Fortunately this has been great because that was our strategy. About 76 percent of our orders are now coming from urban sophisticates and 24 percent are coming from younger folks. In the summer it was the opposite--it was 20 percent from urban sophisticates and 80 percent from Web potatoes or college students.

Like most dot-coms that spent big on growing their businesses and capturing market share, did Kozmo expand too quickly?
I think Kozmo fit the Internet blueprint at the time--unfortunately. And so in terms of scaling back and refining our strategy, it hasn't been different from other companies that had aspirations to go public. Now from a traditional sense, what you typically do is perfect the store and once you perfect it, you start rolling it out. In this case we rolled it out and we perfected it later, which is somewhat unique in terms of a historical sense.

Kozmo closed down its operations in Houston and San Diego and laid off hundreds of employees at those facilities, and you've laid off others in other rounds.
You know, laying people off is never an easy thing. And it's probably been one of the things I liked the least about my job over the last eight or nine months. A year ago, we were really focused on what was important at the time. It was a top-line focus with little regard for the bottom line. That's the philosophy we operated on in the early part of last year.

In reality what happened is I was left with a work force which was quite extensive and not the same expansion strategy. So we made decisions which were important for the long-term viability of the company but clearly impacted many individuals.

Was there another way?
Unfortunately we didn't have the strategy and the model in place today a year ago. And if we had had that model in place, chances are we wouldn't have closed San Diego and Houston. Those decisions were based on preserving cash until we got to a point where we felt comfortable.

We continually evaluate the progress of our markets good and bad. And fortunately, right now, they're all meeting expectations. But things change and economic times change. And so that process is ongoing. I wouldn't envision any more dramatic changes, but we'll continue to be fine-tuning, like any organization goes through.

You said there were problems with Kozmo's model a year ago. What went wrong, and what should have been done then?
The model a year ago was based on catering to young, urban individuals who purchased or rented entertainment items and bought snacks at a relatively low net profit margin. So the model in terms of achieving profitability based on those economics--earning enough gross-margin dollars to cover a free delivery service--was difficult. And I think the changes we made by introducing more food items and higher-ticket items had synergy.

It's safe to say some dot-com offices are suffering from low morale. What is the mood like within the ranks at Kozmo? You guys haven't removed the Foosball table?
The Foosball table is still here, but I'm not sure if it's really used. Everyone is really focused. I mean, there's a lot of late hours going into putting this catalog in place. I would say people are focused.

Have you received complaints about some of the products you're selling, such as liquor products or adult films?
We feel pretty comfortable that we're managing our product offering appropriately. In terms of the adult material, that's not something that I think fits the long-term strategy of the company. So at some point we will exit that business, and more in the near term than long term.

Are you thinking of selling Kozmo? Are you beating potential buyers off with a stick, or is Kozmo dedicated to going it alone?
You know, right now we're not for sale. That's not to say that if a compelling offer came we wouldn't explore it--clearly we would. The desire of the management team is to do the best thing for the employees and the shareholders of the company. But that being said, right now we're just really focused on executing our plan.

What about a merger? Can you tell me what kinds of companies would make a good partner for Kozmo?
I think in our new strategy, it gives us a fair amount of flexibility, whether it's a logistics company or it could be an online company as well as an offline company.
I really think about managing this business. And we're not managing it to sell it; we're managing it to make it successful.

When Amazon.com took a stake in Kozmo last year, there was speculation that Kozmo would be hauling goods to Amazon customers' doors. Why hasn't that happened?
We both have our priorities. In the latter part of last year they were clearly focused on ensuring they had a great fourth quarter and we were focused on repositioning the company. In the meantime, it was an agreement that was put in place that has proven to be somewhat, a little more difficult to implement. It was a one-hour agreement and then it gets really complicated with tax issues and inventory issues, which I won't get into. But we mutually decided not to pursue it any longer.

I see. Is it dead or is it just put on hold?
At this point it's not going to happen.

Kozmo said it will buy liquor stores in areas where liquor licenses aren't available. Could the company take it a step further and open its own stores? When might we see Kozmo stores on our streets?
You know, it's something we're thinking about. It could happen. Right now it's not a high priority. The great thing about retail stores is you always create impressions. One of the limitations of the Internet is that sometimes you're out of sight, so you're out of mind. When consumers drive by a retail store, whether it's The Gap or something else, they're at the top of their customer's mind. That's where the Web limits you.

What must happen for investors to continue funding Kozmo?
Money is drying up--that's painfully obvious. I think for us, we are, as you pointed out, one of the few e-commerce companies that has gotten funded. And the reason is, Kozmo performs and has demonstrated that the model is viable. And month after month we continue to hit our monthly financial projections, both in terms of revenues, but also in terms of our cash burn. So I'm confident that our investors will continue to support the company as long as we continue to perform up to expectations.

There are plenty of people out there, Gerry, who are very skeptical about that--whether the model has proven itself--not just yours. But they look at the Net companies that deliver to customers' homes, such as Streamline and Peapod and Webvan. They look at those ailing or failed companies and they say there's just no profitable way you can deliver consumer goods to customers' doors.
Domino's (Pizza) has 90 percent gross margin and most of their sales are home delivery. Likewise, with us, we have a very high gross margin and most all of our business is home delivery. So I think there are examples of businesses that have been able to demonstrate that it works.

We're completely different from Webvan and Streamline and all those companies. The online grocers and Kozmo are different business models. There's much different economics on the products we sell than what they sell as well as our capital cost to enter a market at a fraction of what theirs are.

Kozmo is going through a time of transition. What do you think is the main, the best, sign that Kozmo will show that these things have worked, that these changes have worked?
I think the fact that our average order size has tripled, we've been able to push a fair amount of the business to the early part of the day, our gross margins are up toward 50 percent really validates that our strategy of diversifying our customer base to more affluent urban sophisticates has really worked.

You ever get on a bike and deliver this stuff?
I was a picker and a packer; I spent a lot of time putting videos back. And then I made a couple of odd deliveries on foot, but not on a bike. I have a retail background, so understanding who your customer is and understanding the operations firsthand is the true mark of any successful retailer.